A (smarter) happily ever after

Jennifer Jolly called off a wedding. But not her own—her client’s.

The bride-to-be contacted Jolly, a lawyer at BLG in Ottawa, a week before her nuptials. The woman’s fiancé, who was also her employer, had handed her a marriage contract that would waive her spousal support if they separated.

Read: What would you pay to be in Hugh Hefner’s shoes?

The terms were particularly unfair, Jolly says, because the couple wanted to have children. “I told her we had to plan for what would happen if it didn’t work out. She’d lose her job and she may have kids to support.”

The wedding was postponed while both parties negotiated. But there was a happy ending when the client’s fiancé agreed to provide spousal support if they had children and then split. The couple got hitched.

To avoid such last-minute hassles, Jolly says, couples should discuss and sign contracts before getting married.

Howard Feldman, a Toronto family lawyer, agrees. These marriage contracts, also called prenuptial agreements, are important because they protect both parties if unions end.

And when clients draw one up, adds Feldman, it’s crucial they abide by the terms and keep it up to date.

“Sometimes people sign a contract and live completely contrary to it,” he says. “They shift assets back and forth as a result of tax issues, debt or just plain love. When the contract is triggered as a result of death or if the marriage falls apart, they’re shocked and it causes many problems in court.”

8.5

Risk

Not having a marriage contract means clients could lose wealth.

For instance, a contract could state the husband gets the business and the wife gets the house if they separate. But if, during the marriage, he sells the business, takes the proceeds and pays off the house, she’d get a mortgage-free house upon separation and he’d get nothing.

In second and third marriages, couples are usually more open to signing marriage contracts after being burned before. But, says Feldman, these marriages also have more financial complications, such as spousal support, kids, more assets and higher expenses. For these couples, the goal is to protect their homes, while still providing for any children from previous unions.

A prenup is set in stone

Not true. Lack of independent legal advice and failure to completely disclose income and assets can make it void.

Often, clients don’t know the house they live in is deemed the matrimonial home, says Jolly. This means both parties get an equal share if they separate.

Let’s say your Ontario client buys a $400,000 house. Ten years later she marries and her husband moves in. Six years later, they split. Even though she bought the home, and probably put in more equity, she and her husband would each get half its worth at that time.

“You can’t get an exemption for that,” says Jolly. “There’s a deduction for everything else you bring in, including RRSPs, but not for the house itself.”

This differs for common-law couples, who only share property if ownership is under both names.

Read: Advise common-law clients to plan for split

If both spouses contribute to the mortgage, Jolly suggests using a mathematical formula to allocate each person’s share of the home equity and then including those details within the marriage contract.

Clients could also work out an expense-sharing formula, says Feldman. It could state the wife owns the house and the husband lives there, but he will pay two-thirds of the expenses.

But clients must abide by these rules, and “in some cases it’s better not to put expense-sharing in the contract,” says Feldman. “If someone doesn’t pay, it could get tricky proving [in court] who paid what 20 years down the road.”

Children are another complication. For instance, if a husband doesn’t plan to provide for his wife’s children from her first marriage and the couple then splits, he might still have to pay.

“Ontario law says if you’ve acted as a parent to the child, you may be obligated to support the child if there’s a question [he] won’t be supported,” says Jolly.

While the courts examine situations like this on a case-by-case basis, one example of obligation could be if a stepfather contributes to a child’s university tuition.

“So if you don’t intend to have a relationship with the child, put it in the contract—but there’s still a chance it might not hold up in court.”

Get clients to say “I do”

Getting couples to warm to marriage contracts can be tricky because the idea things might not work out seems ridiculous—they’re in love.

But advisors should discuss marriage contracts as part of every client’s financial plan, says Zena Amundsen, an advisor at Tyler & Associates in Regina, Sask.

Her clients fill out worksheets that include assets, liabilities, insurance and benefits—the latter are usually afterthoughts for clients, so she makes them the forefront of conversation.

“If they have personal insurance or group benefits, they may have never spoken about that,” she says. “So they’ve forgotten they need to change their beneficiaries in a new marriage.”

Read: Marriage contracts protect assets

And when openly taking inventory of expenses and assets, she says, clients often learn new tidbits that help them realize protecting wealth is important. For instance, one client never knew her fiancé had a boat and an RV in storage.

Once they’ve agreed to negotiate and sign a contract, explain they must each have independent legal advice and there must be complete disclosure of income and assets, says Jolly.

“If they aren’t disclosing a material asset, then the contract won’t be worth what it’s written on,” she says.

A court can set aside a contract if it’s unconscionable, including if a significant asset wasn’t disclosed.

Warning

If your child is getting married, make sure he signs a prenup.

For instance, if the contract states one spouse is worth $100,000, but in fact her total worth is closer to $600,000, notes Jolly, it could be nullified.

Advisors should refer clients to lawyers who specialize in family law, adds Amundsen.

And keep in mind a new marriage revokes a will, adds Feldman. So when clients sign prenups, get them to update their wills as well.

Parents beware

Divorces are expensive, but the bride and groom aren’t the only ones who could suffer if they don’t sign a marriage contract.

Zena Amundsen, certified financial planner at Tyler & Associates in Regina, Sask., has a retired client whose son is separating from his wife.

A widow in her 70s, she’s dipping into savings to support him. When Amundsen spoke to the son, she learned he and his spouse never signed a marriage contract because they thought it would cost too much.

“We’d missed the boat on the marriage contract, so I suggested he get advice for a legal separation,” she says.

But he didn’t. He thought he and his wife would separate amicably.

She also asked him to fill out worksheets stating his assets and liabilities. Again, he refused.

Instead, he took out a $500,000, six-month line of credit, using the equity from the marital home, and bought a condo so he’d have a place to live while the house sold. At the time, the wife agreed because they were still on good terms.

Fast forward six months—the relationship has soured and the house hasn’t sold. To make matters worse, he lost his job due to unrelated events, and had to give up the condo to pay off the line of credit.

His mother, Amundsen’s client, has given him money from her non-registered savings to rent an apartment and cover day-to-day expenses while he gets his life back on track.

Amundsen has been forced to update her client’s retirement plan.

“She doesn’t have the means to live beyond what we’d set up for her,” says Amundsen. “She’s on a fixed income, and I’ve done a calculation to show her the shortfall. She reduced the amount of what she’s helping by, but I’ve still given her a deadline to follow up in six weeks to see if we can resolve this because the funds simply aren’t there.”

Suzanne Sharma is the associate editor of Advisor Group.